John Nellis

Privatization in Latin America

In Latin America, privatization started earlier and spread farther and more rapidly than in almost any other part of the world. More, and larger, firms were sold, and more proceeds were raised. Despite positive microeconomic results, privatization is highly and increasingly unpopular in the region. The core social criticism is that privatization contributes to growing poverty and inequality levels in Latin America—and circumstantial evidence supports the claim. But recent and rigorous studies dilute or counter the negative views, concluding that privatization has contributed only slightly to rising unemployment and in equality, and either reduces poverty or has no effect on it. Still, while privatization may be winning the economic battle it is losing the political war: The benefits are spread widely, small for each affected consumer or taxpayer, and occur (or accrue) in the medium-term. In contrast, the costs are large for those concerned, who tend to be visible, vocal, urban and organized, a potent political combination.

Privatization in Africa: What Has Happened? What is to be Done?

Sub-Saharan African states urgently need expanded and more dynamic private sectors, more efficient and effective infrastructure/utility provision, and increased investment from both domestic and foreign sources. Privatization is one way to address these problems. But African states have generally been slow and reluctant privatizers; a good percentage of industrial/manufacturing and most infrastructure still remains in state hands. Given prevailing public hostility towards privatization, and widespread institutional weaknesses, such caution is defensible, but nonetheless very costly. The long-run and difficult solution is the creation and reinforcement of the institutions that underpin and guide proper market operations. In the interim, African governments and donors have little choice but to continue to experiment with the use of externally supplied substitutes for gaps in local regulatory and legal systems.

Privatization: A Summary Assessment

In the last 25 years many thousands of formerly state-owned and operated firms have been privatized in developing and transition countries, generating over

Privatization in Developing Countries: A Summary Assessment

400 billion (US) in sales proceeds. In addition, thousands of firms have been transferred by privatization processes in which no money was raised (though a surprising number of state-owned firms remain in these regions). The vast majority of economic studies praise privatization’s positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty——at least in the best-studied Latin American cases. In sum, the technical picture is generally positive. Nonetheless, public opinion in the less developed world is generally suspicious of, and often hostile to, privatization. A good part of the problem is that privatization has proven harder to launch, and is more likely to produce errant results, in low-income, institutionally weak states, particularly in the most important infrastructure sectors. Privatization is hard to sell politically; it has become a lightning rod and handy scapegoat for all discontent related to liberalization and globalization. What is needed are reform mechanisms that give incentives and comfort to reputable private investors, that create and sustain the policy and regulatory institutions that make governments competent and honest partners with the private operators, while at the same time protecting consumers, particularly the most disadvantaged, from abuse.

The Evolution of Enterprise Reform in Africa: From State-Owned Enterprises to Private Participation in Infrastructure - and Back?

In the last 25 years many thousands of formerly state-owned firms have been privatized in transition economies, generating over U.S.

The World Bank, Privatization and Enterprise Reform in Transition Economies: A Retrospective Analysis

400 billion in sales proceeds. In addition, thousands of firms have been privatized by methods in which no money was raised. The vast majority of economic studies praise privatizations positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Even so, public opinion in the developing world is quite hostile to privatization. The process has proven harder to launch, and more likely to produce errant results in institutionally weak states. A successful privatization process requires mechanisms that give private investors incentives and comfort, that create and sustain the policies and regulatory institutions that make governments competent and honest partners with private partners, and that protect consumers, particularly the most disadvantaged, from abuse.

The International Experience with Privatization: Its Rapid Rise, Partial Fall and Uncertain Future

Many African state-owned enterprises (SOEs), particularly those in infrastructure, have a long history of poor performance. From the outset, SOE financial and economic performance generally failed to meet the expectations of their creators and funders. By the late 1970s, the situation was alarming, and by early 1980s, critical. The poor financial performance of SOEs became so burdensome to government budgets that it attracted the attention of the international financial institutions, or IFIs. In response, in the 1980s, the World Bank approved SOE reforms that could be summed up in the term “commercialization”. By the mid-1990s, however, the idea of making SOEs function efficiently and effectively under government management was largely abandoned by the IFIs and privatization and private participation in infrastructure, or PPI became the order of the day. Once more, however, the results were disappointing. PPI has not been as widely adopted as anticipated, nor has it generated the massive resources and changes hoped for, nor has it been widely accepted as beneficial by the African public. The findings of recent studies in Africa suggest that PPI should not be jettisoned, and that the more productive path is to recognize the limitations of the approach, and to work harder at creating the conditions needed to make it function effectively. This will entail, as many have recognized, an end to the view that public and private infrastructure provision is a dichotomy – a case of either-or, one or the other – and a better appreciation of the extent to which the performance of each is dependent on the competence of the other. In other words, for the private sector to perform well, public sector capacity must be enhanced. Moreover, proposed tactics of reform should fit more closely with the expectations and sentiments of the affected government, consumer base, and general population. This broader approach implies, probably, a reduction in the scope and, certainly, a reduction in the planned speed of operations. Improving infrastructure performance is a long-term matter.

External Advisors and Privatization in Transition Economies

This conceptual account details the approach to privatization, and enterprise reform of three major countries in transition: Poland, Russia, and the Czech Republic / Slovakia. It discusses the states of mind that prevailed in each country, the perceptions of the Bank at various places and moments, the initial conditions faced by reformers, and those who assisted them, and, the policy frameworks that evolved. The collapse of communism, led to believe that in entering a period of extraordinary economic policy, one could privatize conglomerates without breaking them up, and assume that competition would prevent the abuse of market power, disregarding the effects of structural barriers to imports from exchange rate issues; assign restructuring, and corporate governance responsibilities to second-phase private owners, neglecting existing weak institutional mechanisms that would prevent this secondary trading to succeed; and, depend on new private shareholders to lobby for further reform liberalization, overlooking an evident absence of institutional framework. Concluding observations indicate that earlier, and more attention should have been paid to prudential regulations in capital, and financial markets, including institutional development matters. Specifically, the Bank might have done better to further advocate the approach used by Estonia (despite being a case not easily replicated), i.e., limiting the exchange of vouchers to minority stakes if a controlling majority had already been sold to a core investor. However, while privatization could have been better managed, evidence shows it has proven its worth, and should not be accountable for all the problems of transition.

Back to the Future for African Infrastructure? Why State-Ownership Is No More Promising the Second Time Around

From a triumphant high in the late 20th century, esteem for privatization has significantly declined, post-2000. Politicians and businesspeople alike now take a more balanced view of its effectiveness, recognizing that privatization must happen in a supportive institutional and policy framework if it is to live up to its potential. They have also come to share a better understanding of the sociopolitical consequences – especially with regard to public opinion – that privatization inevitably brings with it. This paper provides a comprehensive examination of this 21st century global shift in perception, with an emphasis on developing and emerging markets. Through a rich trove of case studies, it accounts for why privatization has slowed, analyzing current and past trends from a variety of sectors worldwide. It also offers a thorough analysis of privatization’s effects on economies, societies and the political process, while giving ample space to critics’ views. Although powerbrokers now tend to view privatization warily, there is good reason to believe that, due to the impact of the ongoing global economic crisis on government budgets, its day will come again. This paper, with its impressively detailed and wide-ranging grasp of the phenomenon, is essential reading for academics, policymakers and economists – the individuals who must grapple with privatization’s implications when that day arrives.

Time to rethink privatization in transition economies

This paper analyzes privatization and enterprise reform of three major countries in the transition region; Poland, Czechoslovakia (subsequently the Czech Republic), and the Soviet Union (subsequently Russia). For each, it discusses the prevailing ideologies of advisors prior to and during the transition process, the initial conditions faced by reformers and advisors, the policy frameworks that evolved, the results achieved, the mistakes made, and the opportunities missed. The ultimate conclusion is that while privatization could have and probably should have been done better, it nonetheless had to be done. The Czech Republic and Russia, and others in the region, are better off after the flawed privatizations they carried out than they would have been had they avoided or delayed divestiture. Poland, which did quite well at first in the absence of mass and rapid privatization, now finds itself burdened with a number of expensive and unproductive state firms. This paper shows how and why these outcomes came about, and what was the role of the external advisor community in the process.